Homebuilders face cost pressure as Russia tightens rules on presales

Homebuilders face cost pressure as Russia tightens rules on presales
04/07/2018 , by , in INTERNATIONAL

A new law forcing Russian home builders to use bank loans to fund construction rather than relying on cash from selling homes before they are complete will add to costs and encourage industry consolidation, developers said.

Homebuilders, such as PIK, LSR and Etalon, put flats up for sale when ground is barely broken on construction sites and sell most before completion.

Russians spend hundreds of billions of roubles a year buying yet-to-be-built apartments, effectively co-financing construction so developers do not need to raise debt financing.

Buying an apartment when building starts can cost 40 percent less than the equivalent finished flat, making it a popular practice. Prices rise as construction progresses.

But the scheme has been misused. Russian authorities have in the past two years had to help out about 30,000 customers of insolvent real estate developer Su-155 which failed to hand over pre-paid flats.

Last year, home buyers from the Siberian city of Krasnoyarsk, who were left without flats they had paid for, travelled more than 3,000 km (1900 miles) to Moscow to protest after the local authorities were unable to solve their case.

As protests gained pace, President Vladimir Putin ordered his government to restrict financing of housing construction with the funds of flat buyers, gradually replacing the scheme with bank loans and other financing instruments.

New rules, designed to protect apartment buyers that are due to come into force in July 2019 but which still await Putin’s final approval, will ban home builders from taking customers’ money before construction is completed.

During a year-long transition before the law takes full effect next year, developers will be monitored on their use of cash that has been paid for unfinished flats.

Big players are in a better position to adapt to the new rules but would still have to raise prices to offset higher financing costs or face a squeeze on margins, developers said, adding that smaller players could be pushed out of the market.

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